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Markets experienced strong gains in May, riding on a strong first-quarter earnings season. However, gains were curbed due to a variety of factors. Trade tensions between the United States and China remained heightened. Geopolitical tensions with North Korea and political developments in Europe also weighed on investors. Trump’s decision to exit the Iran nuclear deal resulted in a spike in oil prices.

May’s Performance

For the month of May, all three major stock market indexes ended in the green, extending gains made in April. The Dow, the S&P 500, and the Nasdaq increased 1.1%, 2.2% and 5.3%, respectively.

First-quarter earnings have exhibited the highest quarterly growth pace in seven years. While this has boosted markets, trade conflicts continue to take a toll on the market resulting in severe volatility. In addition, hike in yield of 10-year U.S. Treasury Note due to inflationary fears and political turmoil in Italy and Spain also created market fluctuations.

Mixed Economic Signals

Economic data released last month was largely mixed in nature. The unemployment rate dropped to 3.9% in April, hitting a near 18-year low. However, job additions came in at 164,000 against expectations of 195,000.

Also, according to the Department of Commerce’s second estimate, U.S. GDP increased at a 2.2% pace in the first quarter. This was marginally below the initial estimate of 2.3%. Consumer spending expanded only 1% in the first quarter, less than the earlier estimate of a 1.1% increase. This was the most sluggish rate of growth experienced since 2013.

Q1 Earnings Set to End on a Strong Note

For the 493 S&P 500 members that have reported Q1 results as of May 31, total earnings are up +24.3% from the same period last year on +8.7% higher revenues, with 76.9% beating EPS estimates and 74.4% beating revenue estimates.

Looking at Q1 as a whole, total earnings are expected to be up +24.2% from the same period last year on +8.6% higher revenues, the highest quarterly earnings growth pace in 7 years. (Read: Earnings Picture Good, But Not Improving)

Trade Tensions Rise

Trade-related tensions had investors on tenterhooks throughout May. On May 17, Trump casts doubts on the possibility of a successful outcome from ongoing trade related negotiations with China. His statement came even as a high level Chinese government delegation is in Washington to meet for a second round of talks to chalk out an amicable solution.

On May 20, Secretary Steven Mnuchin said the White House will suspend tariffs on $150 billion worth of Chinese goods. The Trump administration will continue to work on the deal between the economies to “put the trade war on hold.”

However, on May 29, the Trump administration stated that it will continue to take action on trade with China despite the fact that the two countries are engaged in high-level talks to defuse trade tensions.

The United States will also continue to pursue litigation against China at the World Trade Organization. In a recent press release, the White House stated that the U.S. government is likely to release a list of $50 billion worth of Chinese goods that will be subject to a 25% tariff.

Also, On May 31, Commerce Secretary Wilbur Ross announced that the U.S. government will impose 25% tariff on steel and 10% on aluminum from the imports of Canada, Mexico and the European Union from June 1. The announcement spooked investors as it raised the specter of the imposition of retaliatory tariffs on U.S. exports.

Geopolitical Tensions Heighten

On May 24, President Trump cancelled the scheduled June 12 Singapore summit with North Korea’s Kim Jong Un. Trump cited “open hostility” from North Korea as the reason behind the cancellation of the meeting. This would have been the first face-to-face meeting with an U.S. president and a North Korean leader.

Meanwhile, late in the month, a constitutional crisis broke out in Italy after president Sergio Mattarella vetoed the appointment of economy minister Paolo Savona. Italy’s economy minister is known to have criticized the EU and European integration.

At conclusion of its two-day policy meeting on May 2, the Federal Reserve kept the benchmark interest rate unchanged, in line with market expectations. The central bank mentioned that the latest readings indicates both overall and core inflation have moved close to its 2% target rate and inflation is expected to remain at this level in the medium term.

Minutes from the Fed’s May 2 meeting showed that most of the policymakers have agreed that a strong economic outlook warranted a rate hike “soon.” However, Fed officials also mentioned that it won’t be a problem if prices of essential commodities went past the Fed’s target range of 2% and concluded that rate hikes will be gradual this year. (Read: Rate-Sensitive Stocks Cheer Fed Meet Outcome: 5 Solid Buys)

Oil Breaches $70 Barrier on Iran Deal Exit

On May 8, Trump announced that the United States would be pulling out of Iran nuclear deal and would re-impose sanctions on that country. Benchmark prices for U.S. crude oil touched $70 a barrel on May 7 for the first time in four years, anticipating such an announcement.

Subsequently, oil prices trended higher over the month until May 25. Oil prices declined during that trading session following news that OPEC and Russia are planning to increase crude oil production by 1 million barrels a day.

However, a rebound came on May 30, following a report by Reuters that OPEC and non-OPEC allies led by Russia are likely to abide by a global pact on cutting oil supplies until the end of 2018. Consequently, WTI crude experienced its highest gain in three weeks, after losing almost 8% over the last five sessions.

Turtle Beach’s expected earnings growth for the current year is more than 100%. The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 17.79x.

Shoe Carnival, Inc. (SCVL - Free Report) is one of the largest family footwear retailers in the United States.

Price gain over the last 4 weeks = 36.6%Expected earnings growth for current year = 35.9%

Shoe Carnival has a P/E (F1) of 16.45x.

Micron Technology, Inc. (MU - Free Report) is one of the leading worldwide providers of semiconductor memory solutions.

Price gain over the last 4 weeks = 36.4%

Micron Technology has a P/E (F1) of 5.43x and its expected earnings growth for the current year is more than 100%.

Federated National Holding Company (FNHC - Free Report) is an insurance holding company, which through its subsidiaries, controls all aspects of the insurance underwriting, distribution and claims processes.

Price gain over the last 4 weeks = 35.6%

Federated National Holding’s expected earnings growth for the current year is more than 100%. The stock has a P/E (F1) of 10.40x.

Luxfer Holdings PLC (LXFR - Free Report) is a materials technology company specializing in the design, manufacture and supply of high-performance materials, components and gas cylinders.

Price gain over the last 4 weeks = 34.1%Expected earnings growth for current year = 26.5%

Luxfer Holdings has a P/E (F1) of 14.98x.

Can Benchmarks Move Higher in June?

At the moment, investors are faced with a number of challenges, most of which are external. The initial euphoria over Trump’s tax cuts have died down. They have been replaced with fears about his stance on trade and geopolitical issues.

External shocks such as the political situation in Europe are also weighing on investor sentiment. With the earnings season coming to a close, investors will likely look toward economic data for encouragement in the month ahead. If they choose to focus on strong fundamentals, markets will likely sustain their gains in the month ahead.

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